Bonds

Double-A-rated Hawaii has same pension funded ratio as New Jersey, Illinois

Despite several years of efforts, Hawaii’s funded pension ratio hovers around 50%, the same level as Illinois and New Jersey, the states with the lowest bond ratings, and yet the state retains its double-A-level ratings.

S&P Global Ratings upgraded the state a notch to AA-plus from AA in 2016 with analysts partly citing a plan that set a steady course to pay down the unfunded liabilities.

“The other reasons that we raised the rating, is that they were able to show strong financial management, they built up the reserves significantly and showed they had a long-term financial plan,” said Ladunni Okolo, an S&P Global Ratings director. “They also made some prefunding to OPEB [other-post employment benefits].”

Hawaii’s low funded pension ratio hasn’t hurt the state’s double-A credit ratings.

Bloomberg News

Though pension treatment is a key factor in ratings, the Aloha state’s robust reserves and other factors have enabled it to retain its AA-plus rating, Okolo said.

Hawaii also has stayed the course on pension reforms implemented in 2016 that would enable it to pay down its unfunded pension liabilities over 30 years, Okolo said.

When considering unfunded pension liability, the actuarial path over 30 years is considered, as well as its current level of funding.

“The state ramped up pension payments over four years between 2016 and 2020, and continued to do that in 2021,” Okolo said.

It increased contributions from the general fund by 24% and increased payments for public safety by 40%, but in 2017 it also made changes to the assumptions reducing the assumed rate of return on investments to 7% from 7.5%

“They also made other changes to assumptions, and as a result the funded pension ratio dropped to 51%” Okolo said.

Lowering the rate of return can also decrease the funded ratio, but it’s considered a good fiscal practice, because it protects pension funds against market downturns.

“They made pension funding level reforms and demonstrated the financial commitment to follow through,” Okolo said. “That hasn’t changed. It takes a while for the pension funded levels to go up, because it’s a function of contribution rates and the returns.”

Hawaii was able to retain its rating from S&P, and ratings of Aa2 from Moody’s Investors Service and AA Fitch Ratings through the pandemic. Though it received negative outlooks from all three rating agencies in April 2020 as the pandemic cratered tourism, an economic driver for the state; outlooks had all been revised to stable as of late 2021.

Tourism, the lifeblood of the state economy is recovering strongly from the pandemic. In April, 818,268 visitors came to the Hawaiian Islands, representing a 96.3% recovery compared to April 2019, according to the Department of Business, Economic Development and Tourism. In April 2020, amid strict pandemic quarantine restrictions, only 4,654 visitors entered Hawaii.

The Hawaii Council on Revenues reported on May 26 that revenues for fiscal 2022 were expected to be 28% higher than the prior year, a total of $9.2 billion.

S&P returned the outlook to stable in September 2021 albeit with some caveats, including concerns over its “comparatively elevated fixed costs as it continues to address its weak pension funding and large other postemployment benefit obligation, which will require ongoing active budgetary management to avoid future budgetary stress.”

As for the difference in the ratings between the Aloha State, and New Jersey and Illinois, Okolo said, “pensions are just one thing we look at. We also look at the economy and the outlook for the state’s economy and if they are able to address the headwinds they face. Illinois has not been without specific challenges in terms of finances. We aren’t just looking at the UAL. It’s easy to say the funding levels are the same, but there are also other things in their fiscal outlooks, which is why there is a rating differential.

Illinois holds ratings of Baa1 from Moody’s and BBB-plus from both Fitch and S&P. The state has received several upgrades recently after being hit with eight rating downgrades between 2015 and 2017.

New Jersey also received a bond upgrade from Moody’s in March to A2 from A3, which cited a debt-reduction program and increased pension contributions. It holds ratings of BBB-plus from S&P, A-minus from Fitch and A from Kroll Bond Rating Agency.

“Hawaii has increased contributions, but it takes time,” said Todd Kanaster, an S&P director. “Illinois and New Jersey have also ramped up contributions, but they are individual states that we need to look at on an individual basis.”

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